‘Shale oil is the innovation of 21st century’

The twin techniques of horizontal drilling and hydrofracking have not only driven the US dollar to new highs, they have slashed the price of oil around the world, and reshaped the global economy in doing so.

Workers at a Mitchell Energy gas well near Ponder, Texas. George  Mitchell’s company was among the first to yield gas from the US Barnett formation, marking the beginning of the shale age in America.  Greg Smith / Corbis
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Horizontal drilling and hydrofracking have revolutionised not only the oil business but also the global economy.

They have reduced the price of a barrel of oil by 60 per cent and chopped the US oil trade deficit by US$300 billion per year. Shale oil has propelled the US dollar to new highs even as it has cut Opec export revenues by more than half. Shale has been a game changer in every sense of the word.

Shale’s origins were modest. While major oil companies, such as Shell and Exxon, were seeking to increase oil production through ever-grander projects in deep water and in the Arctic, George Mitchell, a Greek immigrant to the United States, was trying to develop more basic techniques to extract shale oil and gas resources from formations already well-known and developed in the US for decades. Eventually, Mr Mitchell’s company learnt how to yield gas from the Barnett formation, marking the beginning of the shale age in America.

Neither horizontal drilling nor fracking were new. Directional drilling goes back to the 1930s, and modern horizontal drilling was practiced more than a quarter century ago. Hydrofracturing wells – fracking – to improve the flow from an oil or gas reservoir has been a standard well completion technique since 1950, so much so that the US had recorded 2.5 million “frac jobs” by 2012.

However, such techniques were expensive and unproductive when applied to shale. Mr Mitchell’s contribution was not pure innovation, but rather the development of an approach that was both productive and cost effective, at least in the environment of high oil and gas prices that prevailed after 2005.

Shale production began with gas, as shale oil was considered to be unsuitable for commercial extraction. With natural gas in the US typically selling at $7.00 per million British Thermal units (mmbtu) after 2005 – and as high as $12 per mmbtu in 2008 – shale operators had every incentive to borrow money and drill for gas.

By late 2009, shale gas was so successful that gas prices were falling and the finances of shale gas producers were looking increasingly precarious. With the collapse of gas prices in 2011, many shale operators turned to shale oil, hoping to capitalise on, nd seek survival through, still sky-high oil prices.

Once again, the US industry adapted successfully and by 2012, the shale oil revolution was under way. Shale gas techniques had been successfully grafted on to shale oil plays.

And then, just as had been the case with shale gas, shale oil tanked oil prices. Once again, shale operators scrambled to survive.

But the stream of innovation has been continuous. First, operators sought to drill longer laterals, the horizontal sections of wells. These have doubled over time and now many can be more than 3 kilometres long.

An important complement has been pad drilling, where up to six wells are drilled from a single site, allowing more efficient use of rig time. A rig can, routinely, drill a well in less than two weeks. Three years ago, it took a month. As more wells are drilled in a single location, costs fall and production increases.

More recently, operators have moved to slickwater fracs. This technique involves using water without additives, except for a polyacrylamide friction reducer. But without additives, more water under greater pressure is needed to get the job done, with volumes increasing from 4 to 8 million gallons of water per well. On the positive side, slickwater fracs reduce problems with additives and create larger and deeper fractures in the shale bed. This, in turn, calls for even more proppant – sand – which is injected into the fractures to keep them open. In the last year alone, per well volumes of sand injected have increased from 3.5 million pounds to 7 million pounds, with 10 million pounds on the horizon. This equals 200 lorryloads of sand for a single well.

None of these methods are new, but they are being increasingly applied to shale oil as the operators better learn the business. The results can be spectacular, with enhanced sand completions, for example, increasing production by 50 per cent over the critical first two months of a well’s life.

All these innovations reduce cost or increase output, and consequently US shales have weathered the collapse of oil prices far better than originally expected. When oil prices started falling last year, US drilling rig counts plummeted. But when US oil prices settled at $60 this past July, rig counts stabilised and production began to move up. Fearing a growing oil glut, investors panicked, and the oil price fell by $15 a barrel, prompting rig counts to ease once again. Now, however, horizontal oil rig counts have again started to rise, even at oil prices now barely holding $41 a barrel.

When pundits in the US media and academia speak of technological progress, they almost always mean electronics, biotech or information technology. They never mention shale oil and fracking as high tech or innovative. But the markets and economy do not care whether innovation was hard or simple, whether it was attained by Stanford scientists or North Dakota rough necks, or whether it involved some sort of deep insight or simply the perseverance of men working at dirty jobs in the field.

What markets care about is the outcome, the effect on society. In this, shale is unparalleled. Since the shale oil revolution, GDP growth in the US has exceeded that of Europe by 10 percentage points. The US unemployment rate over that period has fallen from 9 per cent to 5 per cent, even as it has risen in Europe from 10 per cent to almost 11 per cent. The big difference in the two regions? The US had shale oil and gas, Europe didn’t.

Shale oil, along with the smart phone, have been the two critical innovations of the last decade. But shale oil is more important, because it has restored mobility and economic growth to the US and, more recently, to other advanced economies. It is the greatest innovation of the 21st century.

Steven Kopits is the president of Princeton Energy Advisors in Princeton, New Jersey.

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